Constituent Funds and Investment Rules
What this domain tests
How MPF money may be invested, through which vehicles, and within which limits. This is the territory of the MPF Schemes (General) Regulation and the MPFA's investment guidance.
Vehicles
A constituent fund may invest in listed shares, debt securities, deposits and collective investment schemes, typically through APIFs; index-tracking funds and guaranteed funds are common. Every constituent fund must have a stated investment policy and objective in the offering document, and must invest consistently with it.
Restrictions to know
- Borrowing and granting loans are prohibited; derivatives are permitted only for hedging, not for gearing.
- Direct investment in real property and commodities is not allowed; exposure comes indirectly through listed securities or authorised funds.
- Diversification: broadly, no more than 10% of a constituent fund's assets in securities of a single issuer, with special treatment for government and specified quasi-government issuers.
- Control limits: a fund may not hold more than 10% of the shares of any one class, or 10% of the voting power, of a company.
- Connected-person and self-dealing limits apply, and scheme assets must be held by an approved custodian independent of the trustee and investment manager.
- Currency rules have historically required a minimum proportion of Hong Kong dollar investments; check the current requirement before relying on any figure.
Worked example
A fund with net asset value of HK$200 million proposes to buy HK$25 million of bonds issued by one conglomerate plus HK$5 million of the same group's listed shares. Issuer exposure is HK$30 million, i.e. 15% of NAV, which breaches the 10% single-issuer limit even though the two instruments are in different asset classes. Limits apply at issuer level, not instrument level.
Traps that cost marks
- Applying the 10% limit per instrument instead of per issuer.
- Thinking derivatives may be used to enhance returns through leverage.
- Assuming a fund may hold property directly because the brochure mentions property exposure.
- Forgetting that the custodian must be independent and approved by the MPFA.
- Ignoring the concentration limit when a fund holds several securities from one group.